'Earnings growth at risk if Covid cases could continue to rise for long'

Market movement will depend on the extent of the second wave and also the period for which it lasts, says Dr Poonam Tandon of IndiaFirst Life Insurance

India is better placed among emerging countries and will continue to see higher allocation as the domestic economy is recovering quite well, DR. POONAM TANDON, chief investment officer at IndiaFirst Life Insurance Company tells Puneet Wadhwa in an interview. Edited excerpts:

Do you see more downside in the markets over the next few months?

Markets are likely to be volatile over the next few months. Market movement will depend on the extent of the second wave and also the period for which it lasts. Restrictions by the State governments will impact earnings growth in the near-term. Earnings growth will be at risk if Covid cases could continue to rise for long. All this will certainly impact market sentiment. That said, valuations are not cheap. In this backdrop, our portfolio alignment has been more dynamic and bottom-up with a focus on cyclicals and capex driven sectors.

Overweight and underweight sectors?

We continue to evaluate opportunities and look to invest in companies with strong fundamentals (which have significant operating and financial leverage) at appropriate valuations for the long term. Our positive bias is for infrastructure, cement, capital goods, metals, utilities, pharma and information technology (IT) sectors. Consumer durables and autos could consolidate for the time being.

Can the market uncertainty derail the primary activity going ahead in FY22?

Public issuances are likely to be higher going ahead, given that the liquidity is expected to remain in surplus mode for a considerable period of time. However, market volatility could impact the timing of new issuances. In our view, the primary market activity is likely to remain buoyant in FY22 as long as interest rates are low.

Do you think the government's divestment agenda will find less takers if the market sentiment does not improve?

Agree that the divestment process has further got delayed due to the pandemic, but the government has been actively pursuing divestment since the last few years. Even if some large divestment targets – Air India and Bharat Petroleum (BPCL) – sail through in the first half of this fiscal, it will set the right momentum for further divestments.

What about flows into the equity segment?

Certainly, the new Joe Biden's tax plan will impact the bond yields in US, which in turn would impact the foreign portfolio investor (FPI) flows into emerging markets (EMs). While there will be various news flows – both on the domestic and global front – that will decide the market direction, India is better placed among emerging countries and will continue to see higher allocation as the domestic economy is recovering quite well.

Are the fears of rising bond yields firmly behind us?

Bond yields in India will remain range-bound for a short time as the Reserve Bank of India (RBI) has come out with G-SAP of Rs 1 trillion for the first quarter (apart from OMO purchases) to make sure that the government's borrowing plan sails through smoothly. However, high inflation, high crude prices and increase in US treasury yields may cause the yields to inch up over this year.